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Catching a Falling Financial Knife

WTO Sides With Chinese State Capitalism Against the U.S.

Politics / US Politics Mar 14, 2011 - 02:51 AM GMT

By: Ian_Fletcher

Politics

The World Trade Organization has a long history of anti-American actions. They’ve just handed us another one, and in the process handed a big freebie to Chinese state capitalism.

Unbeknownst to most Americans, huge sections of our nation’s trade policy aren’t set in this country anymore. They are set by panels of WTO judges in Switzerland, to whom we have signed over the right to rule on the legitimacy of our policies.


At issue in a WTO ruling handed down last Friday is how much scope the U.S. is entitled to in trying to level the playing field for American companies competing against companies subsidized under China’s system of state capitalism.

The specific products at issue in the ruling are steel tubing, off-road tires, and woven sacks. However, as in domestic legal rulings, the implications go far beyond the immediate subject matter.

Since July 2008, the U.S. has imposed tariffs on $200 million worth of steel pipe imports from China, South Korea, and Mexico.

Why? The American position is that we are entitled to apply what are called “countervailing duties” against products that are subsidized by foreign governments. And on top of that, we are also entitled to apply duties designed to counteract the practice of dumping, or selling a product below cost in order to destroy foreign competitors.

Both these responses on our part have long histories of being accepted as legitimate, both under international trade law and in economics. (This is why the WTO had originally accepted our position; the new ruling is actually the result of an appeal by China.)

In terms of international law, one can trace the legitimacy of our policies at least as far back as the founding of the General Agreement on Tariffs and Trade, the WTO’s predecessor, in 1947.

In terms of economics, their justifying logic is very simple.

In the case of subsidies, free trade only makes sense if it really is free, which means that a thumb on the scale at one end of the transaction justifies a tariff, or counter-subsidy, at the other end.

In the case of dumping, free trade is not justified if one side sells below cost in order to wipe out the other and thus eventually grab the market (or most of it) for itself. Even if the attempt fails, the damage done to our industries will be real, and by then it will be too late.

There’s no serious question about whether China engages in subsidies and dumping. That’s why, in this case, we imposed duties of up to 200 percent to offset their subsidies, plus up to 265 percent to counteract their dumping.

Enter state capitalism. The flashpoint of the current dispute centers on the vexed question of what price constitutes dumping in a non-free-market economy.

In a free-market economy like our own, dumping is considered to occur when a product is sold abroad for either less than its production cost, or less than what it is sold for domestically. Unfortunately, in an economy like China’s, which is so tightly controlled by the government that many prices are essentially whatever the government says they are, this logic doesn’t work. There are no normal prices to observe in order to figure out how big the subsidy is. So the U.S. Government has been using various statistical techniques to calculate the relevant prices.

The WTO has ruled that our techniques are not legit. Bottom line? We're supposed to overlook the vast panoply of subsidies—ranging from free land to cheap loans and a million different tax credits—because state capitalism makes them tricky to calculate.

Free traders are celebrating this ruling. Unfortunately, “free” is the last thing trade with subsidized state capitalism is. It’s controlled. Just not in our interests.

As with many of America’s trade problems, it’s not like we didn’t see this coming. As Leo Gerard, president of the United Steelworkers, has rightly pointed out in protest against this ruling,

When China joined the WTO in 2001, it agreed to be treated as a non-market economy in dumping cases and to be subject to countervailing duty laws, but today the Appellate Body appears to have created special carve outs for China that neither the U.S. nor anyone else agreed to ten years ago.

When will we ever learn? China views trade as economic warfare by other means, and we keep expecting the WTO to somehow make them play fair. We will keep losing jobs and industries until we wise up.

Ian Fletcher is the author of the new book Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95)  He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933.  He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.

© 2011 Copyright  Ian Fletcher - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors


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Catching a Falling Financial Knife